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The European sovereign debt crisis has been created by a combination of complex factors such as:
4.The European sovereign debt crisis has been created by a combination of complex factors such as: the globalization of finance; easy credit conditions during the 2002-2008 period that encouraged high-risk lending and borrowing practices; international trade imbalances; real-estate bubbles that have since burst; slow growth economic conditions 2008 and after; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bailout troubled banking industries and private bondholders, assuming private debt burdens or socializing losses. The interconnection in the global financial system means that if one nation defaults on its sovereign debt or enters into recession that places some of the external private debt at risk as well, the banking systems of creditor nations face losses. In the first weeks of 2010, there was renewed anxiety about excessive national debt. Frightened investors demanded higher interest rates from several governments with higher debt levels or deficits. This in turn makes it difficult for governments to finance further budget deficits and service existing high debt levels. Elected officials have focused on austerity measures (e.g., higher taxes and lower expenses) contributing to social unrest and significant debate among economists, many of whom advocate greater deficits when economies are struggling. Especially in countries where government budget deficits and sovereign debts have increased sharply, a crisis of confidence has emerged with the widening of bond yield spreads.(A)The European sovereign debt crisis has been created by a combination of complex factors. Please explain why these factors have created the crisis.(B)Can you explain why the debt crisis would lead to higher interest rates as well as lower value of Euro?(C)Elected officials in European countries with debt crisis have focused on austerity measures (e.g., higher taxes and lower expenses) contributing to social unrest and significant debate among economists, many of whom advocate greater deficits when economies are struggling. What is your opinion on this dilemma? Why do economists advocate greater deficits?
